Ask Paul: We gave our sons cash to buy homes, how can we protect it from divorce?


Dear Paul,

We gifted our two sons money to buy their homes (we scrimped, sacrificed and saved to help them out - it's their inheritance).

How do they/we protect their assets if/when they become partnered, considering the high number of relationships that break down? - Mel

ask paul clitheroe - we gave our kids cash to buy their homes, how can we protect the assets from future divorce

Excellent question, Mel. This is a challenge for all parents trying to support their kids.

I am not a lawyer but have discussed this issue with a number of expert legal people. The advice I have received over the years has been quite consistent.

Naturally, you should seek your own legal advice from your solicitor, but the key themes are to document the money you provide as a loan.

This requires an agreement, best done by a solicitor. This should contain the terms of the loan and repayment conditions. A loan would generally require regular repayments - this could be modest, but again your solicitor can advise you.

Another step is a second mortgage against the property they buy, as I assume they would need a first mortgage from a lender. This can be tricky as lenders are likely to want the money from you to be a gift, so again your solicitor will provide your best advice.

Some parents go with this full "belt and braces" approach, ensuring that the money is clearly a loan; others go with a middle approach with just a written agreement;  some simply provide the money as a gift and see how things pan out, which is, of course, a risk in the situation you mention of a relationship breakdown

The path you choose is up to you, but to sensibly move to documentation, understand how a second mortgage may work and how this may or may not fit with a bank loan, a solicitor is really important.

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Paul Clitheroe AM is founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Ask Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. View our disclaimer.
Anon Reader
October 5, 2022 5.58pm

Wouldn't a testamentary trust work just as well? I am a older single mum with a 20 year old son who I raised alone from birth, and with no help from anyone. When I die, my son will inherit my whole estate which is valued at well over $1.5 million. To secure his assets, my solicitor suggested this is a way to protect my hard work and his future from gold diggers.

John Smith
October 7, 2022 4.19pm

Testamentary trust is for when your dead. The questioner in this case is giving the money while she's alive and kicking so no a testamentary trust isn't going to work for her

Anon Reader
October 8, 2022 11.39am

Oops - I'm an idiot! My plan was to protect the assets after I've gone so it is a different scenario.

My son has pre-approval to purchase his first home (Canberra) but I may need to gift him a few dollars to buy something decent. Looks like a loan letter could be something for us to consider now, in order to ward off any future relationship issues. Thanks for the advice.

Matt Geo
October 7, 2022 1.03pm

I actually experience this very same situation in 2003. My father generously gifted me money so that i and my new bride at the time could purchase a house (in 1998). The deed and the mortgage were in our married names. Fast forward a few years and said bride is discovered sleeping with her boss. An extra wrinkle, we sold during that housing explosion of 02 and doubled what the house was paid for. Soon to be ex bride sees dollar signs and expects proceeds to be split 50-50 (we were in a no fault state). Since we did not initially have your suggested loan letter, my father got a lawyer himself and sued us as a couple, claiming this was a gift to me and not us and since us didn't work out, he wanted his money back plus interest.

It actually worked, even though we were in a no fault state, she only received about $15k out of a $600k sale.

Do what he suggests. Create a loan letter between yourself an your offspring only, put it away in a safe and hopefully you never have to use it.

Rose Davis
December 26, 2022 3.59pm

love it

Liam Shorte
October 7, 2022 8.11pm

If you don't want to or can't get a second mortgage on the property because of an issue like bank financing, then putting a Caveat on the property may be better than nothing to help enforce the loan agreement.

Sy Li
April 15, 2023 8.07pm

When you gift money to your child and do up a loan document, would centerlink treat it as your asset and reduce your age pension, or will centerlink treat it as a gift out?